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The national debt is weird and complicated. About half of the national debt is to the federal government, the federal reserve or state and local governments. I

The national debt is weird and complicated. About half of the national debt is to the federal government, the federal reserve or state and local governments. In other words - the US government is primarily in debt to itself - in a currency that it can print! The government could wipe out half the debt overnight by just forgiving the loans it made to itself. And it could pay off the rest by printing money - which would lead to inflation, but how much really?

api 7y ago
Public debt should really be called something other than debt since it behaves very differently from private debt, especially for nations with sovereign currencies.
- toomuchtodo 7y ago
  It’s more of a security that tracks future national GDP; as long as you believe the US government will continue to exist and have the ability to tax a functioning US economy, treasuries have value.
badrabbit 7y ago
Printing money to pay off debt will not affect the value of the dollar, making the payment less valuable than the debt? If so, wouldn't this affect future ability to sell bonds at a valuable price?
- lmm 7y ago
  The argument I've heard is that T-bills are accepted as basically cash-equivalent by all the serious financial players, so whatever inflationary effect that has has already happened. Replacing them with actual dollars would simplify the system and create more of a level playing field.
  - sailfast 7y ago
    So many of these arguments assume that financial players will keep doing things the way they always have once the monetary playbook since Breton Woods gets thrown out the window. Why would actors continue to behave the same way given a massive change to the market and policy?
    - lmm 7y ago
      What massive change are we talking about? Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity, and any serious player knows that. Monetizing the debt wouldn't be a radical change, it would be a tidying up of the existing system that makes it clearer and easier for small-time players and private individuals.
      - sailfast 7y ago
        > Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently? I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
        lmm 7y ago
        > What assumptions allow serious players to assume this? I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way. The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example. I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.
Mengkudulangsat 7y ago
If you go to Cambodia, the high street malls quote prices both in local currency and USD. As long as there is demand by external parties to transact between themselves using your fiat, you can print ad-infinitum. Lucky you.
- sailfast 7y ago
  You might be surprised how quickly people shift to another currency once yours becomes unstable. Why don’t they use their own currency again?... something something hyperinflation / instability / bad monetary policy. Printing money to pay debt ad infinitum is bad monetary policy.
sailfast 7y ago
Those organizations aren’t the same thing. It’s not in debt to itself. I’m not sure what this means. You could make up new money, perhaps, but it’s tough when you’re still running $1T in the red each year, knowing you need to do it again. This seems like a gross oversimplification of an extremely complex problem (whose complexity you mention) whose answer instead should maybe be “maybe $1T is too much money to be in debt - how about $200M and we plan to be neutral in 10 years (or something rational) so we use serious debt for real catastrophes instead of made-up ones?
lalaland1125 7y ago
Those loans aren't simply from the government to itself, they consist of committed money to particular entitlements or programs. "Forgiving" those loans is equivalent to cutting those programs.
- millstone 7y ago
  Isn't forgiveness the opposite? If the Highway Fund built too many highways, and was in debt, BUT the debt is forgiven, it's a transfer to the Highway Fund.
viraptor 7y ago
Trying to explore that a bit: Is there any expectation of what would happen if the US did start printing money to pay off state/local government debt? The immediate thought is of course the inflation. But given that this money sponsors state/local projects which would otherwise not be funded, potentially both providing new jobs and improving infrastructure/services, maybe there's a line where it's a win overall?
stephen_g 7y ago
"Printing money" is a bit of a loaded term and has little applicability to how central banks actually work. The Fed could basically convert the bonds into dollars in an account with the treasury - which is completely asset neutral. The bondholders before had extremely liquid bonds which are basically cash-equivalent. Now they have cash. Basically moving from one column in a spreadsheet to another, and suddenly the debt is gone. Yes, there's still a liability, but only in the same way that deposits in a bank are liabilities to them. Would it create inflation? No, why would it? Inflation happens when money is spent (which happened back when the bond was issued, because it was probably issued in the same amount of Government deficit spending), and since the transaction is asset-neutral, it wouldn't necessarily change any of the bond-holder's spending patterns. Of course, the thing at the end of the day is that people have bought those bonds because they want a safe interest-bearing instrument. The central bank or Government of a monetarily sovereign country doesn't really need to issue them to deficit spend, it's more that there's a lot of demand for them to exist...
- sfj 7y ago
  > Would it create inflation? No, why would it? This depends if people are forward looking or not. Bonds have terms, an account in the Treasury does not, which means it has no real meaning at all (It has no effect on anything so who cares if it ever gets paid back?). So, this is just obfuscation of money printing. When a government starts money printing, their money doesn't look so good anymore.
Lazare 7y ago
I'd be careful about running too far with that argument. Of the debt you've flagged as not "real", that would include ~$3T owed to the OASDI trust funds. On the one hand: Yes, that represents a debt the US government owes to itself, and in a very real sense is not real. The SSA could announce they were tearing up the debt, and boom, the US national debt has now dropped by a hefty chunk! On the other hand: That money is slated to pay social security beneficiaries. Tearing up the debt doesn't make the retirees go away, nor the obligations of the system. Assuming that the social security checks still go out, then cancelling that debt has done nothing. The same is true of all of the rest of the debt too. "It's owed to a state government, it's not real!" True, but the state government is counting on getting that money. If they don't, they'll need to source it from somewhere else (via some mixture of taxation and cuts).

api 7y ago

Public debt should really be called something other than debt since it behaves very differently from private debt, especially for nations with sovereign currencies.

toomuchtodo 7y ago
It’s more of a security that tracks future national GDP; as long as you believe the US government will continue to exist and have the ability to tax a functioning US economy, treasuries have value.

badrabbit 7y ago

Printing money to pay off debt will not affect the value of the dollar, making the payment less valuable than the debt? If so, wouldn't this affect future ability to sell bonds at a valuable price?

lmm 7y ago
The argument I've heard is that T-bills are accepted as basically cash-equivalent by all the serious financial players, so whatever inflationary effect that has has already happened. Replacing them with actual dollars would simplify the system and create more of a level playing field.
- sailfast 7y ago
  So many of these arguments assume that financial players will keep doing things the way they always have once the monetary playbook since Breton Woods gets thrown out the window. Why would actors continue to behave the same way given a massive change to the market and policy?
  - lmm 7y ago
    What massive change are we talking about? Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity, and any serious player knows that. Monetizing the debt wouldn't be a radical change, it would be a tidying up of the existing system that makes it clearer and easier for small-time players and private individuals.
    - sailfast 7y ago
      > Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently? I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
      - lmm 7y ago
        > What assumptions allow serious players to assume this? I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way. The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example. I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.

Mengkudulangsat 7y ago

If you go to Cambodia, the high street malls quote prices both in local currency and USD. As long as there is demand by external parties to transact between themselves using your fiat, you can print ad-infinitum. Lucky you.

sailfast 7y ago
You might be surprised how quickly people shift to another currency once yours becomes unstable. Why don’t they use their own currency again?... something something hyperinflation / instability / bad monetary policy. Printing money to pay debt ad infinitum is bad monetary policy.

sailfast 7y ago

Those organizations aren’t the same thing. It’s not in debt to itself. I’m not sure what this means. You could make up new money, perhaps, but it’s tough when you’re still running $1T in the red each year, knowing you need to do it again. This seems like a gross oversimplification of an extremely complex problem (whose complexity you mention) whose answer instead should maybe be “maybe $1T is too much money to be in debt - how about $200M and we plan to be neutral in 10 years (or something rational) so we use serious debt for real catastrophes instead of made-up ones?

lalaland1125 7y ago

Those loans aren't simply from the government to itself, they consist of committed money to particular entitlements or programs. "Forgiving" those loans is equivalent to cutting those programs.

millstone 7y ago
Isn't forgiveness the opposite? If the Highway Fund built too many highways, and was in debt, BUT the debt is forgiven, it's a transfer to the Highway Fund.

viraptor 7y ago

Trying to explore that a bit: Is there any expectation of what would happen if the US did start printing money to pay off state/local government debt? The immediate thought is of course the inflation. But given that this money sponsors state/local projects which would otherwise not be funded, potentially both providing new jobs and improving infrastructure/services, maybe there's a line where it's a win overall?

stephen_g 7y ago

"Printing money" is a bit of a loaded term and has little applicability to how central banks actually work. The Fed could basically convert the bonds into dollars in an account with the treasury - which is completely asset neutral. The bondholders before had extremely liquid bonds which are basically cash-equivalent. Now they have cash. Basically moving from one column in a spreadsheet to another, and suddenly the debt is gone. Yes, there's still a liability, but only in the same way that deposits in a bank are liabilities to them. Would it create inflation? No, why would it? Inflation happens when money is spent (which happened back when the bond was issued, because it was probably issued in the same amount of Government deficit spending), and since the transaction is asset-neutral, it wouldn't necessarily change any of the bond-holder's spending patterns. Of course, the thing at the end of the day is that people have bought those bonds because they want a safe interest-bearing instrument. The central bank or Government of a monetarily sovereign country doesn't really need to issue them to deficit spend, it's more that there's a lot of demand for them to exist...

sfj 7y ago
> Would it create inflation? No, why would it? This depends if people are forward looking or not. Bonds have terms, an account in the Treasury does not, which means it has no real meaning at all (It has no effect on anything so who cares if it ever gets paid back?). So, this is just obfuscation of money printing. When a government starts money printing, their money doesn't look so good anymore.

Lazare 7y ago

I'd be careful about running too far with that argument. Of the debt you've flagged as not "real", that would include ~$3T owed to the OASDI trust funds. On the one hand: Yes, that represents a debt the US government owes to itself, and in a very real sense is not real. The SSA could announce they were tearing up the debt, and boom, the US national debt has now dropped by a hefty chunk! On the other hand: That money is slated to pay social security beneficiaries. Tearing up the debt doesn't make the retirees go away, nor the obligations of the system. Assuming that the social security checks still go out, then cancelling that debt has done nothing. The same is true of all of the rest of the debt too. "It's owed to a state government, it's not real!" True, but the state government is counting on getting that money. If they don't, they'll need to source it from somewhere else (via some mixture of taxation and cuts).